DP17095 Price elasticity of demand and risk-bearing capacity in sovereign bond auctions
The paper uses data on bids submitted by primary dealer banks at auctions of sovereign debt to quantify the price elasticity of demand. The price elasticity of demand correlates strongly with the volatility of returns of the same bonds traded in the secondary market but only weakly with their bid-ask spread, a standard measure of market liquidity. The price elasticity of demand predicts the post-auction return of the same bonds in the secondary market at various horizons. The evidence suggests that the price elasticity of demand is associated with the magnitude of price pressure in the secondary market around auction days, and proxies for dealer risk-bearing capacity.